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CNO Financial Group Inc. (CNO - Analyst Report) recently announced that it has repurchased approximately 5.62 million shares for $6.95 per share in the second quarter of 2012. The quarterly repurchase has more than doubled from 2.44 million shares bought back in the prior quarter. The repurchased shares represented 2.4% of the outstanding shares at the end of the first quarter.

CNO Financial spent $39.3 million in aggregate for the buyback in the second quarter, thus increasing the company’s expenditure on share repurchase for the first half of 2012 to $58.2 million. The company repurchased 8.09 million shares at an average price of $7.19 in the first half of 2012.

Additionally, CNO Financial prepaid $22 million on its outstanding debt under the Senior Secured Credit Agreement, thereby repaying the full amount scheduled on March 31, 2016, and a portion of the repayment scheduled on December 31, 2015. Per the terms of the agreement, the company is required to make principal prepayment equal to the amount of outflow toward certain restricted payments (which include share repurchases and divined payment), in case its debt-to-total capitalization ratio exceeds 17.5%.

However, if CNO Financial’s debt-to-total capitalization ratio stays between 12.5% and 17.5%, principal prepayment of 50% of such amount has to be made, while no mandatory principal prepayment is required when the ratio is below 12.5%.

Consequently, with a debt-to-total capital ratio of 16.9% as of March 31, 2012, the company was required to prepay 50% of the amount spent on share buybacks and dividend payment. The company paid its first quarterly dividend of 2 cents per share on June 25, 2012.

Concurrently, CNO Financial announced a $100 million hike it its share repurchase authorization to $172.1 million. This is the second hike this year after it increased the authorization by $100 million in February. The company expects to spend $150–$170 million on share repurchase during 2012. Outstanding shares as of June 29, 2012 stood at 234 million.

CNO Financial’s robust capital position enables it to regularly return value to shareholders through share buybacks, whereas the repayment of the entire outstanding balance on the Senior Health notes removed the restriction on dividend payment, allowing the company to initiate a quarterly dividend policy in May this year.

Moreover, a strong cash flow will cushion the financial position of CNO Financial from the impact of the cash outflows. The company had a cash balance of $173.5 million as of March 31, 2012, while the operating cash flow during the first quarter amounted to $78.2 million.

The share repurchases and debt prepayment by CNO Financial will likely have an incremental effect on its book value and boost its future earnings per share. Moreover, the principal prepayment will reduce CNO Financial’s total cost of debt and debt-to-total capital ratio.

The announcement was viewed positively by investors, leading to a 3.7% rise in CNO Financial’s share price to close at $7.80 on Friday. The company competes with AFLAC Inc. (AFL - Analyst Report) and Torchmark Corp. (TMK - Analyst Report).

Currently, CNO Financial carries a Zacks #3 Rank, which translates into a short-term ‘Hold’ rating. We have a long-term Neutral recommendation on the stock.

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